Crude tariff rate strategies diverge among midstream operators

Tariff rate compression, often referred to as a race to the bottom for midstream operators, was a hallmark of the Covid-19 pandemic for some crude pipelines. As stocks built and inland differentials tightened, pipeline operators were forced to lower tariff rates to keep barrels flowing on their pipelines. Our new North American Oil Pipeline Tariffs product helps shed light on the tariff rate strategies pursued by midstream players.

For Permian crude pipeline operators, that race to the bottom was on top of stiff competition out of a basin that saw its takeaway capacity nearly double since January 2019. That meant a one-two punch of competition and narrow differentials, which sent tariff rates for some pipelines plummeting. All at a time when those same operators were trying to make sure their investments were profitable and well-utilized.

While oil prices underwent a remarkable recovery in late 2020, inland differentials, particularly between the Permian basin and the US Gulf Coast, remained tight. That's where tariff strategies diverged.

Diverging strategies – with varying degrees of flexibility

In December 2019, before the pandemic began, EPIC Midstream's 600,000 bpd Permian-to-Gulf Coast pipeline offered a spot rate of $1.35/bbl for its Crane, TX,-to-Corpus Christi, TX, route in an attempt to attract uncommitted shippers. Those were the same terms offered to committed shippers. However, beginning August 2020, EPIC began charging $4.53/bbl for uncommitted shipments on that same route. EPIC's crude pipeline was approximately 52% utilized in 2020, according to Railroad Commission of Texas (TxRRC) data provided via Wood Mackenzie’s Gulf Coast Pipelines service.

Plains All American, in an attempt to hold firm on its rates, offered a spot rate of $4.75/bbl from August 2019 to July 2020 for its Midland-to-Ingleside, TX, route along the 670,000 bpd Cactus II pipeline. As of July 2021, that rate was just $.07/bbl higher at $4.82/bbl. Plains’ Cactus II pipeline was approximately 69% utilized in 2020, also according to TxRRC data via our Gulf Coast Pipelines service.

Other pipeline operators chose a more flexible option. Magellan Midstream offered a variable tariff rate beginning April 2020 for its 440,000 bpd Midland-to-Houston BridgeTex pipeline, which charged the differential (price of crude at Houston minus the price of crude at Midland) minus $.40. That lasted for approximately three months, at which point Magellan began charging a more static rate of $4.48/bbl for that same route. As of July 2021, that tariff rate was down to $4.45/bbl. The BridgeTex pipeline had a utilization rate of 76% in 2020, according to TxRRC data via our Gulf Coast Pipelines service.

A return to form for the Permian?

With the differential between Midland and Houston pricing sitting at a mere $0.48/bbl year-to-date, third party spot rates are clearly out of the money and the differential is firmly driven by pipeline internal marketing affiliates. However, we expect the Permian basin, the crown jewel of the US onshore production growth story, to return to form in 2022 with producers more confidently deploying capital, adding rigs and inflecting supply growth higher, according to our North American Crude Markets Service.

Returning supply growth to the region will begin to fill the substantive excess pipeline capacity and return pricing power to pipelines in re-contracting efforts and once again make spot rates relevant for differential conversations. Having a view into changes in pipeline pricing strategy will be critical in understanding relative pricing trends in West Texas.

Casting a light on investment potential

Tariff rates are a fundamental component of arbitrages (although causation can go both ways), corporate earnings and netback calculations. As such, they offer considerable insight into an asset's projected performance, and by extension the performance of those entities that hold the asset (see our 2021 North America crude pipeline financial report for a more in-depth analysis). They can also shed light on the health of a particular region's investment potential. A midstream operator might not be inclined, for example, to invest in a project where the differential is less than the price to move a barrel of oil out of that particular basin.

Our North American Oil Pipeline Tariffs product is the first of its kind, and offers full data and platform access to our North American oil pipeline tariffs. Users can integrate the tariff data with our existing proprietary pipeline flow data, and access PDFs of the tariffs themselves, all via our API or Oil Portal. Please complete the form on this page to download the product brochure and learn more about this offering.